ans to univ theory qs-management control

7/30/2019 Ans to Univ Theory Qs-Management Control

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MCS (Answers to Univ Theory Qs)

Topic: Management Control Systems

May 2010

Q1, May 2010 (6 marks)

(a)Briefly describe the overall framework of Management Control.

(b) How does it relate to Strategic Planning and Operations Control?

(a)Briefly describe the overall framework of Management Control.

Suggested Answer:

Management Control is the process by which managers influence other members of theorganisation to implement the organisations strategies.

The main objective of management control is to implement the goals and strategies

formulated by the CEO with the advice of senior management.

Management control involves the following activities:

1. Planning what the organization should do

2. Co-ordinating the activities of the different parts of the organization

3. Communicating information

4. Evaluating information5. Deciding what action is to be taken based on the evaluation

6. Influencing the people to change their behaviour


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These activities are operated through the various stages of the following Formal

Control Process chart:

Reward

Yes

No

Revise Revise Measurement

Feedback

Communication

The chart operates as under:

1. The top management of the company, i.e., the CEO and senior managementteam, make its goals and strategies keeping in view the companys corecompetencies, other strengths, weaknesses, opportunities and threats. This is

called strategy formulation. (Block A).2. The Goals and Strategies are worked out in extensive details in the form of

Strategic Planning (Block B) (Please note that the function carried out inBlock A is called Strategy Formulation, whereas the function carried out inBlock B is called Strategic Planning.

3. Keeping in view the organization structure (i.e., Functional Organization orBusiness Unit Organization or Matrix Organization), an Annual Master Budgetfor the organization is prepared. This forms the activity of Budgeting (Block C)

Goals and

Strategies

(Block A)

Rules

(Block E)

Other

Information(Block F)

Strategic

Planning(Block B)

Responsibility

Center(Block D)

Budgeting

(Block C)

Report actual

versus plan(Block G)

Was

performancesatisfactory?

(Block (H)


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4. Through these Budgets, different Responsibility Targets or Plans are

assigned to the various Responsibility Centers (Block D)

5. The Responsibility Centers also receive the various formal rules in the control

process. These are shown through Block E.

6. Other necessary information required by the Responsibility Center is also

provided through Block F.

7. The Responsibility Centers are required to give their actual performance as

per the required format to enable proper comparison with the Centers

Budgets. This is done on a monthly or quarterly basis as per the requirement

of the System adopted by the company. This Report of Actual versus Plan is

received (Block G).

8. The comparison of Reported Actual with the Plan is measured (quantified)

and an analysis of the variance is done (both quantity and price/cost

variance).

9. On this basis the Responsibility Center-wise conclusions are drawn whetherthe performance of each Center was satisfactory or not. (Block H).

10. If the Responsibility Centers performance was satisfactory, then the Center is

given the positive feedback and suitably rewarded as per the System

11.If the Responsibility Centers performance was not satisfactory, then the

feedback is given to (a) the Responsibility Center, (b) the Budgeting Dept,

and (c) the Strategic Planning. This is because the unsatisfactory

performance may not be purely because of underperformance of the Center;

there may be a shortcoming in the Budget or in the Strategy Plan itself. This

gives all the three the feedback so that they can independently assess

whether (a) the Responsibility Center has slipped in performance, or (b)whether the Budget was not practical or proper, or (c) whether the strategy

itself needs any alteration.

12. The revised course of action when the Responsibility Center has not

performed satisfactorily is reworked and given to the concerned Center.

13. Thus the cycle of the Formal Control Process is completed and the next cycle

begins.


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(b) How does it relate to Strategic Planning and Operations Control?

Suggested Answer:

Strategic Planning and Operations control form a part of management control systems.

Competent managers need to think continuously about the future and, in so doing, theyprepare a formal statement of the direction in which the entity is going to go ahead. Thisformal statement is called a strategic plan. Strategic planning is the process of decidingon the programs that the organizations will undertake and the resources required for thesame. This is carried out in Block B of the above chart.

The purpose of Operations control is to review and evaluate the performance of theday-to-day output relative to the budgets. If the performance meets the standardssought in the budget, then the operations team is rewarded. On the other hand, a failureto meet the standards signals that either there is a deficiency in the performance, or

else, the budget may need to be altered to make it more realistic and achievable. Thisactivity is carried out in Block H of the above chart.

____________________________________________________


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May 2010


What do you understand by Balanced Score Card? Explain with an example.

Suggested Answer:

Comparison of the actual financial performance with financial budgets is one type ofperformance measurement. Although financial performance, is important, it is not theonly aspect of an organisations performance. There are other non-financial measureswhich also play important roles in achieving the companys strategy.

Thus, to implement the companys strategy, several performance measures (in additionto financial measures) are adopted. The management selects those measures whichbest represent the companys strategy and will result in the success of the company.

One of the widely adopted performance measurement system is The Balanced ScoreCard (BSC). BSC was developed by Robert Kaplan and David Norton of HarvardUniversity in 1992.

According to the BSC method, the following four measures are typically measured:

1. Financial (profit margins, return on assets, cash flow, return on investment,EVA)

2. Customer Value performance (market share, customer satisfaction index,customer loyalty)

3. (a)Internal business process(productivity rates, quality measures, tilmeliness)

(b) Employee performance (morale, knowledge, turnover, best practices)4. Innovation and learning (percentage of sales from new products, employee

suggestions, rate of improvement index)

The BSC provides a balance between the different strategic measures so as to achieveGoal Congruence.


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Explanation with an example:

Infosys adopted BSC as given below:

As seen from the above, for Infosys Ltd., it has included

(i) Shareholder perspective

(ii) Customer satisfaction

(iii) Employee perspective

(iv) Society perspective

as the four key measures for its Balanced Score Card. This indicates the approach and

the factors which the management of Infosys believes is most important for the success

of the company.

Likewise, BSC are prepared for different businesses such as hospitals (Apollo

Hospitals), auto companies (Tata Motors), etc.


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November 2010

Q2, Nov 2010 (6 marks)

Explain briefly the various stages of management control process citing salientfeatures of each.

Suggested Answer:

Management Control is the process by which managers influence other members of the

organisation to implement the organisations strategies.







4. Evaluating information

5. Deciding what action is to be taken based on the evaluation



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These activities are operated through various stages of the following Formal Control

Process chart:

Reward

Yes

No


Feedback

Communication

The salient features of each stage are as under:

1. The top management of the company, i.e., the CEO and senior managementteam, make its goals and strategies keeping in view the companys core

competencies, other strengths, weaknesses, opportunities and threats. This iscalled strategy formulation. (Block A).

2. The Goals and Strategies are worked out in extensive details in the form ofStrategic Planning (Block B) (Please note that the function carried out inBlock A is called Strategy Formulation, whereas the function carried out inBlock B is called Strategic Planning.

Goals and

Strategies

(Block A)

Rules

(Block E)

OtherInformation

(Block F)

StrategicPlanning

(Block B)

ResponsibilityCenter

(Block D)

Budgeting(Block C)

Report actualversus plan

(Block G)

Wasperformance

satisfactory?

(Block (H)


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5. The Responsibility Centers also receive the various formal rules in the controlprocess. These are shown through Block E.







received (Block G).



variance).

9. On this basis the Responsibility Center-wise conclusions are drawn whether

the performance of each Center was satisfactory or not. (Block H).

10.If the Responsibility Centers performance was satisfactory, then the Center is





performance may not be purely because of underperformance of the Center;there may be a shortcoming in the Budget or in the Strategy Plan itself. This


whether (a) the Responsibility Center has slipped in performance, or (b)

whether the Budget was not practical or proper, or (c) whether the strategy





begins.

________________________________________________________


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May 2011


(a)Define Management Control System.(b)Which level of managers are in it?(c)How does MCS differ from Simpler Control processes?

Suggested Answer (combined for (a), (b) and (c)):

Management Control System is the process by which managers influence other

members of the organization to implement the 11rganizations strategies.



Organizations formulate their Goals, and the related Strategies which are required to

attain these goals. This process is called Strategy Formulation.

Goalsare the broad overall aims, e.g., (i) earning a satisfactory return on investment,

(ii) attaining a large market share, (iii) providing best possible services, etc.

Strategies are the big and important plans for attaining these goals. The senior

management of an organization works out these strategies which give the direction in

which the organization should move.

After the Strategy Formulation process, the next step is to implement or execute thesestrategies. The implementation of these strategies is carried out through a process or

system, termed as Management Control Process (or System) (MCS).With the help of

MCS, the senior management of the organization influences other members,

down the line, so that the strategies are best implemented. MCS is facilitated and

carried out by a formal system that includes a recurring cycle of activities, which are

prescribed in the system. Thus, management control focuses primarily on strategy

execution and management control systems are the tools for implementing strategies.

This process relates to both types of activities: (a) ongoing operations, and (b) new and

discrete projects.

MCS is one of the three planning and control functions, the other two being (i) Strategy

Formulation, and (ii) Task Control.

Strategy Formulation is the largely unsystematic process of identifying opportunities and

threats.


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Simpler Control Process, also called as Task Control Process, is the process of

ensuring that specified tasks are carried out effectively and efficiently.

MCS fits between Strategy Formulation and Task Control.

The above is summarized in the exhibit below:

Activity Nature of End Product

Strategy

Formulat ion

Goals, strategies, andpolicies

Management

Contro l

Implementation ofStrategies

Simpler

Process(Task)

Contro l

Efficient and effectiveperformance of individualtasks.

Simpler Control process is transaction oriented that is, it involves performance

of individual tasks according to rules established in the management control

process. Often, such simpler processes are controlled through machines rather than

human beings e.g., process control computers, robots, etc. An example of such a

simpler process control is the amount and timing of purchases when the economic order

levels fall below desired levels. Some of the other examples in simpler process control

are - scheduling, order entry, logistics, quality control, cash management.

_________________________________________


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Q9 (b), May 2011(3 marks)Write short note on Balanced Score Card :

Comparison of the actual financial performance with financial budgets is one type ofperformance measurement. Although financial performance, is important, it is not the

only aspect of an organisations performance. There are other non-financial measureswhich also play important roles in achieving the companys strategy.

Thus, to implement the companys strategy, several performance measures (in additionto financial measures) are adopted. The management selects those measures whichbest represent the companys strategy and will result in the success of the company.

One of the widely adopted performance measurement system is The Balanced ScoreCard (BSC). BSC was developed by Robert Kaplan and David Norton of HarvardUniversity in 1992.


1. Financial (profit margins, return on assets, cash flow, return on investment, EVA)2. Customer Value performance (market share, customer satisfaction index,

customer loyalty)3. (a)Internal business process(productivity rates, quality measures, tilmeliness)

(c) Employee performance (morale, knowledge, turnover, best practices)4. Innovation and learning (percentage of sales from new products, employee


The BSC provides a balance between the different strategic measures so as to achieveGoal Congruence.

More than 60% of the Fortune 500 companies adopt BSC,BSC is most prevalent in not-for-profit companies.

Tata Motors (first in India to adopt BSC), Godrej-GE appliances, Phillips and Infosysare the prominent Indian companies to adopt BSC. The most important measure usedby Indian companies after finance is customer.


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Q9 (c ), May 2011 (3 marks)Write short note on Interactive Controls :

An organization first decides its goals.

It then makes broad plans, called strategies, and also decides certain policies toachieve these goals; this activity is called strategy formulation.

After the strategy is formulated, the next step is to implement or execute this strategy.This activity is called management controland is carried out through a formal systemcalled management control system.

Thus, the primary objective of management control is to ensure the implementation /execution of the strategies chosen by the top management of the company.

The strategies are based on circumstances which exist at the time when the strategies

were formulated. If these circumstances have changed at the time of implementation,the actions dictated by the plan may no longer be appropriate or relevant. Thus, thestrategy which was sound at the time of formulation may become deficient at the time ofimplementation and lose its soundness.Thus, while management control is generally committed to ensure the implementation /execution of the strategies, companies need to pay attention to strategic uncertaintiesi.e., changes which have occurred in the strategies. In these cases, the companyssenior management reviews or revises its strategies through a process calledInteractive Controls.

This is schematically shown below:

This occurs in industries which are subject to rapid environmental changes,For example, in India, the telecom policy went through many changes after the 2Gscam; as a result, telecom companies had to align their new strategies in line with thenew policy. Similar change took place in Thermal Power Projects when the policy forallocation of coal mines changed.

Interactive controls are an integral part of the management control systems.

Todays Controls

Tomorrows

Strategy


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__________________________________________November 2011

Q4, Nov 2011 (6 marks)

Explain briefly the various stages of management control process citing theirsalient features.

(same as Q2, Nov 2010)


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Q 5(a), Nov 2011Explain possible reasons for failure of Balanced Score Card.(3 marks)


1. Financial (profit margins, return on assets, cash flow, return on investment,EVA)

2. Customer Value performance (market share, customer satisfaction index,customer loyalty)

3. (a) Internal business process(productivity rates, quality measures, tilmeliness)(b) Employee performance (morale, knowledge, turnover, best practices)

4. Innovation and learning (percentage of sales from new products, employee


More than 60% of the Fortune 500 companies adopt BSC,

Although the balanced scorecard has many advocates, support is by no meansuniversal or unqualified.

The main reasons for failure of BSC in certain companies are as follows:

1. The measures selected are not valid, i.e., there is no proper causal link betweenthe performance measure and the strategy. There is lack of understanding in themanagement of the relationship between the non-financial measures and thestrategy.

2. The performance measures are not deeply rooted into the organization. They areonly formulated by the top management and distributed in a top-down manner,but not inculcated into the fabric of the organization. Thus, these measures arenot functional at the operating levels, and hence not effective.

3. The model does not take into account factors like external competition andtechnological advance.

__________________________________________________


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April, 2012

Q1, April 2012 (6 marks)

(b)Explain the perspective of Management Control System.

Suggested Answer

(b)

The perspective of Management Control System (MCS) is essentially that of

strategy implementation.

MCS draws its importance and relevance from the fact that many companies

with the best of strategies have failed mainly on account of not executing their

strategies well; examples of such companies are Enron, WorldCom.

On the other hand, companies such as Wal-Mart, Cisco Systems, Dell

Computers, owe their success largely to their competence in properly executing

their strategies.

As organizations grow and decentralize, it is inevitable that the approach to managing

has to be driven through systems. In this endeavour, organizations generally adopt a

certain systematic approach to planning and managing themselves.

Organizations first formulate their Goals, and the related Strategies which are required

to attain these goals. This process is called Strategy Formulation.

Goalsare the broad overall aims, e.g., (i) earning a satisfactory return on investment,

(ii) attaining a large market share, (iii) providing best possible services, etc.

Strategies are the big and important plans for attaining these goals. The senior

management of an organization works out these strategies which give the direction in

which the organization should move.

After the Strategy Formulation process, the next step is to implement or execute

these strategies. The implementation of these strategies is carried out through a

process or system, termed as Management Con trol Proc ess (or System) (MCS).

With the help of MCS, the senior management of the organization influences other

members, down the line, so that the strategies are best implemented. MCS is facilitated

and carried out by a formal system that includes a recurring cycle of activities, which are

prescribed in the system. Thus, management control focuses primarily on strategy

execution and management control systems are the tools for implementing strategies.


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This process relates to both types of activities: (a) ongoing operations, and (b) new and

discrete projects.

MCS is one of the three planning and control functions, the other two being (i) Strategy

Formulation, and (ii) Task Control.

Strategy Formulation is the largely unsystematic process of identifying opportunities and

threats.

Task Control Process, is the process of ensuring that specified tasks are carried out

effectively and efficiently.

MCS fits between Strategy Formulation and Task Control.

The above is summarized in the exhibit below:

Activity Nature of End Product

Strategy

Formulat ion

Goals, strategies, andpolicies

ManagementControl

Implementation ofStrategies

Task

Control

Efficient and effectiveperformance of individualtasks.

_____________________________________________________


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April, 2012

Q3, April 2012 (6 marks)(b)Explain the formal control system in the organization.

Management Control is the process by which managers influence other members of the

organisation to implement the organisations strategies.







4. Evaluating information

5. Deciding what action is to be taken based on the evaluation



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These activities are operated through the various stages of the following Formal

Control Process chart:

Reward

Yes

No


Feedback

Communication

The chart operates as under:

1. The top management of the company, i.e., the CEO and senior managementteam, make its goals and strategies keeping in view the companys corecompetencies, other strengths, weaknesses, opportunities and threats. This is

called strategy formulation. (Block A).2. The Goals and Strategies are worked out in extensive details in the form of

Strategic Planning (Block B) (Please note that the function carried out inBlock A is called Strategy Formulation, whereas the function carried out inBlock B is called Strategic Planning.


Goals and

Strategies

(Block A)

Rules

(Block E)

Other

Information(Block F)

Strategic

Planning(Block B)

Responsibility

Center(Block D)

Budgeting

(Block C)

Report actual

versus plan(Block G)

Was

performancesatisfactory?

(Block (H)


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5. The Responsibility Centers also receive the various formal rules in the control

process. These are shown through Block E.







received (Block G).



variance).

9. On this basis the Responsibility Center-wise conclusions are drawn whetherthe performance of each Center was satisfactory or not. (Block H).

10.If the Responsibility Centers performance was satisfactory, then the Center is





performance may not be purely because of underperformance of the Center;

there may be a shortcoming in the Budget or in the Strategy Plan itself. This


whether (a) the Responsibility Center has slipped in performance, or (b)whether the Budget was not practical or proper, or (c) whether the strategy





begins.

_____________________________________________________


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April 2012

Q 6(b), Apr 2012Write short note on; Balanced Score Card

(same as Q9 (b) May 2011)


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Nov, 2012

Q2 Nov 2012 (6 marks)

Discuss and illustrate the differences and similarities between:(a) Strategy Formulation and Task Control(b) Management Control and Task Control

Discuss and illustrate the differences and similarities between:(a) Strategy Formulation and Task Control

Suggested Answer:

1. Strategy Formulation comprises the activities of deciding on the long term

goals of the organization, the adoption of the broad course of action (called

strategy) and policies and allocation of resources for attaining these goals.

Task control is the process of ensuring that specified tasks are carried out

effectively (doing the right thing) and efficiently (doing the thing right- as per

requirement).

2. Strategy Formulation is done by the top management of the company

Task control is done by the individuals who perform the tasks, who would be

in a lower position in the hierarchy of the company

3. Strategy Formulation involves assessing threats, opportunities, and new

ideas, which can happen at any time, and hence cannot be pre-determined.

Task control is transaction-oriented i.e., as per rules of MCS and can be

determined.

4. Strategy Formulation involves judgement and the numbers used are rough

estimates.

Task control numbers are quite precise since there is little uncertainty

5. Strategy Formulation has long-run effect on the company

Task control effect is essentially short-run


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6. Examples of Strategy formulation are

(i) entering a new business - considering all aspects of risks and returns

in such investment

(ii) devise inventory policies say keep not more than its close competitor

(iii) decide whether to have a high gearing of debt or be conservative with

low debt,

(iv) decide the direction of research, whether to invest large amounts

initially or invest over a larger span of time.

Examples of Task Control are:

(i) what should be the daily production schedule, keeping in view the daily

raw material stock(ii) when the raw material stock goes below the re-order level, as decided

by MCS, place the re-order

(iii) manage the daily cash flows; if short, withdraw cash from the Bank

against a limit already in place; if cash in excess, inform treasury dept

to invest in short term investment.

(iv) Within the research project sanctioned, carry out the individual project.

Discuss and illustrate the differences and similarities between:(b) Management Control and Task Control

Suggested Answer:

1. Management Control comprises the activities of translating the broad course

of action (strategy) into a comprehensive financial budget, called the Master

Budget, which is generally for a period of one year. This budget indicates the

amount of revenue, costs of production, marketing, administration, finance

and estimates the profit .At the end of the year (or generally on quarterlybasis) the actual performance under each head is compared with the estimate

and the variance is worked out in order to know how well the company has

performed.

Task control is the process of ensuring that specified tasks are carried out



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2. Management Control is carried out under the Corporate Controller with inputs

from the heads of Business Units.



3. Management Control involves preparation of the Master Budget is prepared

under the Corporate Controller with inputs from the respective heads of the

different Business Units. Thus, unlike Strategy formulation where only the top

management is involved, in Management Control, the top management works

with various Business Unit heads and prepares the Budget. A large team is

thus involved in Management Control.



4. Management Control involves estimates generally for a year and hence there

is some uncertainty for the year. Although the estimates are more precise

compared to Strategy Formulation, they are not as precise as in Task Control.

Task control numbers are quite precise since there is little uncertainty

5. Management Control generally looks at a one year period

Task control effect is essentially much shorter than a year.

6. Examples of Management Control are:

(i) Work out the capital costs and operational costs of expanding the plant

which has been conceived under the strategy formulation

(ii) devise inventory levelsay keep not more than 2 months raw

materials stock, based on information from the BU Manager about the

close competitors level.

(iii) Based on the level of gearing of debt as per the strategy formulated,

raise the debt from the Bank.

(iv) Devise a suitable R&D budget


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Examples of Task Control are:

(i) what should be the daily production schedule, keeping in view the daily

raw material stock

(ii) when the raw material stock goes below the re-order level, as decided

by MCS, place the re-order

(iii) manage the daily cash flows; if short, withdraw cash from the Bank

against a limit already in place; if cash in excess, inform treasury dept

to invest in short term investment.

(iv) Within the research project sanctioned, carry out the individual project.


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Try to remember the points in the chart below:

COMPARISON / EXAMPLES OF STRATEGY F0RMULATION, MCS, AND TASK CONTROL

strategy formulation management control systems (MCS) task control

1 definition

process of deciding on

the long term goals of

the organization and the

adoption of a broad

course of action and the

allocation of resources

for attaining these goals.

MCS is the process by which

managers influence other members

of the organization to implement

these strategies effectively and

efficiently

task control is the process

of ensuring that specified

tasks are carried out


2nature of

activity

involves assessing

threats, opportunities,

and new ideas, which

can happen at any time;

hence cannot be pre-

determined.

Judgement, and

numbers used are rough

estimates

involves a series of steps that occur in

a predictable sequence (master

budget to sub-budgets, and as per

the mcs control process), according

to a time-table, and with reliable

estimates

transaction-oriented, i.e.,

according to rules

established in MCS

process.

3 people involved

few -the sponsor of the

idea, headquarters staff

and senior management

involves managers and their staff at

all levels in the organizationindividual task performers

4who is

affected?organization as a whole

organization along with consideration

for all the business unitsspecific tasks

examples strategy formulation management control systems (MCS) task control

1 enter a new business expand a plant schedule production

2 change debt/equity ratio issue new debt manage cash flows

3 devise inventory policy decide inventory levels reorder an item

4

decide magnitide and

direction of research control research organization

run individual research

project


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Nov, 2012

Q3 Nov 2012 (6 marks)

What is Balanced Score Card? What are the reasons for failure of Balance Score

Card?

(same as Q9, May 2011, alongwith Q 5(a) Nov 2011)

ans to univ theory qs-management control

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